Capital employed under section 80J must follow rule 19A, including liabilities and machinery under installation where precedent applies.

For section 80J deduction, rule 19A governed the computation of capital employed: sub-rule (3) could not be ignored, and debts and liabilities had to be taken into account, following the Supreme Court ruling in Lohia Machines Ltd. v. Union of India. The court also accepted that the cost of machinery under installation could be included in the capital employed computation where binding precedent so required. The note therefore records that the first two issues were resolved against the assessee, while the machinery-under-installation issue was resolved in its favour.

---

---

Issues: (i) whether sub-rule (3) of rule 19A of the Income-tax Rules, 1962, was to be ignored while computing capital employed for deduction under section 80J of the Income-tax Act, 1961; (ii) whether debts and liabilities of the assessee were to be excluded in computing capital under section 80J; and (iii) whether the cost of machinery under installation was to be taken into account while computing relief under section 80J.

Issue (i): Whether sub-rule (3) of rule 19A of the Income-tax Rules, 1962, was to be ignored while computing capital employed for deduction under section 80J of the Income-tax Act, 1961.

Analysis: The first question was covered by the Supreme Court decision in Lohia Machines Ltd. v. Union of India, which upheld the validity and application of rule 19A in computing capital employed for section 80J relief.

Conclusion: The question was answered in the negative, against the assessee and in favour of the Revenue.

Issue (ii): Whether debts and liabilities of the assessee were to be excluded in computing capital under section 80J.

Analysis: The second question was also governed by the same Supreme Court ruling, which required liabilities to be taken into account in the computation under rule 19A.

Conclusion: The question was answered in the negative, against the assessee and in favour of the Revenue.

Issue (iii): Whether the cost of machinery under installation was to be taken into account while computing relief under section 80J.

Analysis: The third question was decided by following the binding view of this court in the later reference concerning the inclusion of machinery under installation in the capital employed computation for section 80J relief.

Conclusion: The question was answered in the affirmative, in favour of the assessee and against the Revenue.

Final Conclusion: The reference was disposed of by denying the assessee's challenge on the first two questions while accepting its claim on the inclusion of machinery under installation for section 80J computation.

Ratio Decidendi: In computing capital employed for section 80J relief, rule 19A governs the calculation, liabilities are not to be ignored, and machinery under installation may be included where the applicable binding precedent so requires.

---